A huge opportunity in retirees' hidden wealth

Freeing up retirees’ housing capital would take pressure off health and pension spending and ease financial stress for all generations. It's a reform that requires tremendous political bravery.

There is an extraordinary political opportunity arising in Australia for whichever side of politics can recognise it first, craft a response and sell it to the Australian people.

For the leader who can pull it off, it would be a reform on a par with Bob Hawke selling enterprise bargaining to the union movement or John Howard selling a new tax – the GST – to Australian voters.

And like those two reforms, it would benefit generations of Australians.

The question for the 44th parliament is: do either Tony Abbott or Bill Shorten have the intelligence, the grit, the bloody-mindedness to start selling a policy that will solve a colossal problem: the increasingly bizarre relationship between the generations caused by our out-of-kilter superannuation investment and housing markets.

The issue is complex, but with the right thinking there is an opportunity to promise (and deliver):

– And economy in which pensioners and super-annuants have more money to spend on themselves or their families, not less

– A more honest, transparent and equitable tax system that rewards hard-work and investment, but that cannot be gamed in the way the current super tax concessions can be.

We do not have such a system at present. As I described at the weekend (How half of our retirement savings went missing, November 8), a massive transfer of wealth between generations has begun that makes a mockery of Australia’s ‘progressive’ tax system – a system that all sides of politics support.

At the outset, it must be acknowledged that the weekend article sparked a fierce and, in many cases, personalised debate between Business Spectator readers.

That shows what a political minefield it is. But then the GST was also a minefield, and Howard successfully carried his government across it. That the reform is so daunting is all the more reason to tackle it.

Let’s revisit the basics.

The finance sector in Australia has evolved over 30 years from a situation where consumers could not access as much credit as they would like for bidding up house prices, to one in which the credit is easily available, resulting in a mature (or possibly over-priced) housing market.

At the same time, Australia’s extraordinary performance through the GFC means that retirees who held assets rather than liquidate them during the crisis have recovered much (though not all) of their personal wealth.

We now have an increasingly top-heavy demographic profile, with older Australians sitting on large assets in those two main baskets: houses and super.

What is left when these Australians die is mostly inherited by the next generation (subject to various taxes). The almost unique market conditions that made the boomers so asset-rich (though not always income-rich) won’t be repeated. Like a juicy meal passing through a python, we can see the lump moving through the economy – and there is no second lump following it.

This once-in-a-life time wealth transfer is being managed by individuals, and some are doing a very good job of balancing their own needs as retirees with the desire to leave a nest-egg for their children and grandchildren.

However, it is a mistake to think that most Australians are doing a good job. As I argued previously, half of a retiree’s assets are often thought to be off-limits and unable to be enjoyed. It’s as if there was a law mandating that half one’s assets must be passed on to younger Australians who didn’t actually earn them.

That wouldn’t matter so much if it weren’t for the fact that a lot of oldies don’t have the retirement income they need for a dignified dotage.

And as described at the weekend, some Australians have woken up to the fact that they can withdraw capital from their paid-off home, live better lives, or even enjoy seeing their money fund useful things for their descendants while they themselves are still alive, such as school fees or house deposits.

Through the three main methods of equity withdrawal – remortgaging, reverse mortgaging, or ‘selling’ part of one’s home to a third party (such as through the Homesafe service in which Bendigo Bank is a 50 per cent shareholder) – a few Aussies are balancing their needs with the needs of the next generation.

The problem – and the political opportunity for the party that can solve it – is that most senior home-owners are not doing this. Indeed, many retirees will be living through hardship, or watching their descendants living through hardship that could be solved with a few strokes of a pen.

Ian Harper, former Fair Pay Commissioner and now a partner with Deloitte Access Economics, says the choice facing Australians is a “lag” in the transfer of assets that could be “smoothed” by a sensible approach to mobilising the capital tied up in the housing market.

Rather that the children of baby-boomers getting a largely untouched dollop of money when their parents houses are sold in, say, 15 years' time, they could receive a smaller dollop and watch their parents leading happier lives in the meantime.

That might upset a few avaricious youngsters, but even the money-grabbers would benefit by large sums of money being spent in the domestic economy, helping create jobs and wealth for gen-X and gen-Y job-hunters.

However, there are problems; the kind of problems only government (right or left leaning) can solve.

Reverse mortgages and other equity release schemes have been used to rip off oldies abroad. Mis-sellers got away with murder in Britain in the 1980s, before the sector was regulated by the UK’s Financial Services Authority.

The now-regulated UK sector is growing at around 15 per cent a year, according to the Financial Times, with the average amount drawn-down by householders being £57,107.

The second problem with liberating similar amounts, whether in the UK or here, is that the investors who buy these ‘parts’ of people’s homes need an attractive risk/return profile to hand over the money.

And that, says Harper, is where politicians come in. Harper would like to see the government guaranteeing a new securities market – let’s call them Equity Release Bonds – by effectively issuing put options on bonds that banks (or others) create by securitising 'parts' of homes.

That would mean if a housing market crash did occur, the government would be buying an investor's $100 bond for, say, $80 and holding to maturity, by which time the asset is likely to have recovered in value. The US government did something similar with its Troubled Asset Relief Program (TARP), which ended up making a profit for taxpayers.

So what at first glance appears to be a socialist plot to ‘steal’ the value of retirees’ homes would be no such thing. Rather, it would use the government’s potential borrowing power (that would only need to be used in a housing crash) to encourage investors to buy parts of retirees’ dwellings.

The creation of such a market would boost consumption spending in everything from retiree-friendly tourism to medical equipment and home renovation. And it would allow those who amassed the wealth to spend more of it, while leaving an appropriate-sized chunk for the next generation.

Such a scheme would also take pressure off the health and pension spending of federal and state budgets, but only if housing assets and superannuation assets were brought together when assessing individuals’ pension and health care entitlements.

The bulge in the python is there, and it will move along to the next generation regardless. If it does so smoothly, all parties – old, young, and the taxpayers supporting a bloated federal budget – will benefit.

However, if Harper’s “lag” is allowed to occur, there will be a period of unnecessary financial stress for many, followed by a sudden transfer of wealth.

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